Monetary Mecca

Your humble blogger is currently on a vacation to see the fall colours (isn't retirement a permanent vac-ca)? Pat and I are in the wilds of New Hampshire, here to scale Mount Washington. OK by car, but it's still a long drive up there.

We will be staying at the famous Mount Washington resort, site of the 1944 Bretton Woods Monetary Conference. The post-war era was shaped by 44 allied nations at that three week set of meetings and discussions. The purpose was an attempt to create a upgraded monetary system for the dynamically changing new world order.

They landed on the U.S. dollar as 'the' reserve currency, including a feature to convert dollars into gold at a fixed price of $35 per ounce. This, however, was not without controversy. John Maynard Keynes, head of the British delegation, fought hard for a world reserve currency, the so-called 'Bancor'. The top U.S. negotiator was Harry Dexter White, who later was caught spying for the Soviets, prevailed in his demands. Bancor was ultimately rejected in favour of the Greenback/Gold model.

Too bad, because the idea of a universal currency was actually the first iteration of a cryptocurrency. Keynes' Bancor would have had the desirable attributes of impartiality and transparency that Bitcoin and its brethren uniquely display. Authority over the currency would have rested on impartial technocrats hired by the newly created IMF. The new currency was to be formula based, objectively measured by trade balances and well protected from intervention or meddling by politicians.

The Bretton Woods system ultimately came apart because of politically motivated decisions during the Nixon era. As debts ballooned during the war-induced fiscal spending in the late 70's, the U.S. dollar became overvalued. A run on U.S. holdings of gold ensued. Unfortunately for Nixon, this also meant the economy was being held back by the exchange imbalance, creating 'Stagflation' and unemployment, which ultimately forced his hand. In an effort to get re-elected by shoring up the economy, in August of 1971, he summarily cancelled the key tenet of Bretton Woods, gold convertibility. Gold began its new era of free market trading by promptly quadrupling.

The loss of economic dominance that Great Britain suffered in the 1940s was quickly replaced by a rising acceptance of the dominance of U.S. power. Bretton Woods cemented that reality by anointing the dollar as the reserve standard for the world. Nixon, with his arbitrary decision, laid bare the weakness of Bretton Woods - political oversight.

Current political instabilities aside, the system of floating exchange rates is working well enough to suffice for now. But as we have seen, any man-made system can fall apart in the blink of an eye, given the temptations of political advancement.

Risk Model: 4/5 - Risk On

The XIU is still bullish with the RSI at 65 and rising. The index is trading at 3.2% above its 200 dma, well below the overbought level of 10%. The AAII Bull/Bear dropped below the moving average, but the VIX is still sleeping and the Copper/Gold ratio is resolving decisively higher after a long summer consolidation.

Bonds are gradually losing steam but have not yet broken down definitively. Oil has failed to maintain its momentum but Copper is re-upping nicely. The Cyclical/Value trade is being lead by the Banks as is always the case in the early stages of rotation. Looks like Oil may be the laggard for this cycle. I'm still in show me mode after last week's failure, but stocks are leading the commodity, always a good sign.